How to Get Out of Debt

If you’re living with a large debt, putting together a budget — an itemized account of income and expenses — is only the first step to getting your financial house in order. You may need to take some bold measures to manage your debts.

Cut deals with your creditors. Ask your creditors to lower your monthly payments on a temporary or permanent basis, reduce the interest rate on your debts, or let you make interest-only payments for a limited period of time. Whenever you talk with a creditor, explain why you’re calling and exactly what you’re asking for. If the first person you speak with says no to your request, politely end the conversation and ask to speak with a manager or supervisor.

Before you approach any of your creditors, you’ve got homework to do.

Create a list of all your debts and the relevant information pertaining to each debt.

Review your budget to figure out how much you can afford to pay on your debts every month, starting with the ones that are the most important. Don’t allow a creditor to pressure you into agreeing to pay more than you think you can afford.

Borrow money to pay off debt. Consolidating debt may not sound sensible, but it can be a smart debt-management strategy. To do it right, all the following should apply when you consolidate:

The interest rate on the new debt is lower than the rates on the debts you pay off.

The monthly amount of the new debt is lower than the combined monthly total for all the debts you consolidate.

The new debt has a fixed interest rate.

You commit to not using credit again until you’ve paid off the new debt.

Get help from a credit counseling agency. The advice and assistance of a credit counseling agency can be a godsend when you have a lot of debt and are confused about what to do.

Be sure to work with a nonprofit, tax-exempt agency that charges you little or nothing for its services. Don’t mistake a debt settlement firm for a credit counseling agency. The goal of debt settlement firms is to profit off of financially stressed consumers, not help them improve their finances. They charge a lot for their services, and many of them don’t deliver on their promises. Consumers who work with debt settlement firms often end up in worse financial shape than they were before.

A reputable credit counseling agency can

Help you set up a household budget.

Evaluate a budget you have already created to suggest changes that will help you get out of debt faster, avoid the loss of assets, and so on.

Negotiate lower payments with your creditors and put you into a debt management plan.

Improve your money management skills.

File for bankruptcy. When you owe too much relative to your income, your best option may be to file for bankruptcy, especially if you’re concerned that one of your creditors is about to take an asset that you own and don’t want to lose.